UK Paycheck Breakdown: Where Every Pound Of Your Salary Goes

How PAYE actually works

Pay As You Earn (PAYE) is the system HMRC uses to collect income tax and National Insurance directly from your salary before it ever reaches your bank account. Every payday, your employer runs your gross pay through a set of fixed rules — a tax-free personal allowance, a series of tax bands, and a separate set of National Insurance thresholds — and hands the difference to HMRC on your behalf. The figures below are illustrative, approximate 2025/26 tax-year bands for a single employee with no other income or unusual tax code adjustments; your own payslip may differ for reasons covered in the FAQ.

The starting point is the personal allowance: £12,570 of income each year that is not taxed at all. Above that, income tax is charged in bands — 20% up to £50,270, 40% up to £125,140, and 45% above that. Separately, employee National Insurance is charged at 8% between £12,570 and £50,270, and 2% above £50,270. The two deductions run side by side, using the same lower threshold but different rates and a different upper cutoff behaviour.

Income tax bands            Employee National Insurance
£0 – £12,570      0%         £0 – £12,570        0%
£12,570 – £50,270 20%        £12,570 – £50,270   8%
£50,270 – £125,140 40%       above £50,270       2%
above £125,140     45%

The £100k trap: why the personal allowance disappears

The personal allowance is not fixed for everyone. Once your income passes £100,000, HMRC tapers it away: for every £2 you earn above that threshold, £1 of your personal allowance disappears. By the time income reaches £125,140, the entire £12,570 allowance is gone and every pound from £0 upward is technically taxable, even though the headline 45% additional rate does not start until £125,140.

This creates a well-known anomaly: in the £100,000–£125,140 band you pay the 40% higher rate and lose allowance at the same time, which is usually described as an effective marginal tax rate of around 60% on that slice of income — higher than the 45% rate that applies to income far above it. It is one of the main reasons higher earners are often advised to increase pension contributions specifically to bring their taxable income back under £100,000, avoiding the trap altogether rather than just reducing the amount taxed at 40%.

Income tax vs. National Insurance — not the same thing

It is easy to lump tax and NI together on a payslip, but they are legally distinct charges with different histories and purposes. Income tax is general taxation that funds the whole of government spending. National Insurance was originally, and nominally still is, a contributory system: paying it builds your entitlement to the state pension and certain contributory benefits, which is why self-employed people pay a different structure (Class 2 and Class 4) and why NI, unlike income tax, is not charged at all once you reach State Pension age.

The rate structures also diverge in an important way: income tax rates step up as you earn more (20% → 40% → 45%), while employee NI rates step down above the upper earnings threshold (8% → 2%). Combine the two and the marginal "tax plus NI" rate rises from 28% below £50,270 to 42% between £50,270 and £100,000 — then spikes to roughly 62% between £100,000 and £125,140 once the personal allowance taper is layered on top, before settling back down to 47% above £125,140. The deduction curve is not one smooth slope; it has a sharp, temporary peak exactly where the allowance disappears.

Pension contributions: the pre-tax discount

Workplace pensions run through salary-sacrifice or net-pay arrangements deduct your contribution from gross salary before income tax and National Insurance are calculated. Practically, that means a £1 pension contribution never actually costs you £1 of take-home pay — it costs you only what you would otherwise have paid in tax and NI on that pound. For a basic-rate taxpayer paying 20% tax and 8% NI, £1 into a pension costs about 72p of take-home pay; for a higher-rate taxpayer paying 40% tax and 2% NI, it costs about 58p. Separate personal pensions (not run through your employer) work slightly differently — you pay in from taxed income and HMRC tops it up with basic-rate relief afterwards — but the net effect on your final tax bill is similar.

Here is a worked example for a £150,000 gross salary with a 10% pension contribution, roughly matching this article's simulation:

Gross salary                         £150,000
Pension contribution (10%)          −£15,000
Taxable pay                          £135,000

Personal allowance (tapered, gone by £125,140):     £0
Income tax:
  20% on £0 – £50,270                  £10,054
  40% on £50,270 – £125,140            £29,948
  45% on £125,140 – £135,000            £4,437
  Total income tax                    ≈ £44,439

Employee NI:
  8% on £12,570 – £50,270               £3,016
  2% on £50,270 – £135,000              £1,695
  Total NI                            ≈ £4,711

Take-home pay  = £135,000 − £44,439 − £4,711 ≈ £85,850/year (≈ £7,154/month)

Student loan repayments: a deduction, not a tax

If you took out a Plan 2 student loan, PAYE also collects repayments automatically: 9% of income above a £27,295 annual threshold, taken alongside — but conceptually separate from — tax and NI. It is not a tax in the legal sense; it is repaying a real loan balance, and for most Plan 2 borrowers the outstanding balance is written off automatically after 30 years regardless of how much has been repaid. Other plans (Plan 1, Plan 4, Plan 5, and Postgraduate Loans) use different thresholds and rates, but the mechanism — a flat percentage of income above a threshold, collected through payroll — is the same across all of them.

Frequently asked questions

Try it live

Everything above runs in your browser — open UK Paycheck Breakdown, drag the gross salary and pension sliders, and tick the student loan box to see every deduction resize instantly. Nothing is installed, nothing is uploaded, the whole model lives in one tab.